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Rediff.com  » Business » What a disappointing Budget!

What a disappointing Budget!

By Vijay Dandapani
July 14, 2004 16:52 IST
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The new Indian government's Budget has been greeted with a variety of reactions based on the constituency one talks to. But for businesspeople in India and abroad the overwhelming sentiment was relief. This had less to do with the government's attempts at presenting a steady fiscal hand than with the relatively limited number of sops for the Left parties that underpin the coalition.

Somewhat like a doctor advising a cancer patient that the prognosis is one of remission rather than cure, the Budget claims to 'maintain' a central government's fiscal deficit of 4.4%.  That, of course, ignores, the reality of a much larger gap arising from profligate state governments -- a total ratio of over 10% which puts India among the top offenders in the category of fiscal deficits.

The lowered expectations are entirely in line with the primary economic vocabulary of the new coalition government -- a common minimum program. While coalition politics are a natural damper for bold policy decisions, the dominant Congress party is poorly positioned as compared to its predecessor to call the bluff of its statist-inclined supporters in the Left.

With virtually no history of working with others at the political table, the Congress has shown a remarkable, yet predictable, lack of imagination in moving the country forward in terms of policy initiatives. Instead, the government seems content to put off any potentially sound economic decisions to the next Budget seven months later.

To begin with the government could have addressed the obviously pernicious effects from India's long history of fiscal deficits. From crowding out of private capital to inefficient use of funds for interest payments and the perennial albatross -- subsidies, high deficits are one of the principal reasons for India's anemic growth. By claiming that revenue enhancement will flow from increases in direct taxes in a broad range of items including the levying of a service tax together with greater collections in corporate and personal taxes, the government hopes to meet the required fiscal stringency criterion.

However, on the indirect tax front, some of the proposals are mystifying.

These include a higher tax on black and white television sets and on steel in response to higher international prices. One of the factors behind worldwide increases in steel prices has been China's massive infrastructure expansion. With steadily reduced tariffs across the board to nearly 15% the Chinese example ought to have been part of the calculus on tariffs for India. More puzzling is the television tax. Black and white television sets are wildly popular in rural areas, a constituency that essentially brought them to power.

A generous perspective on the government's Budget leads one to assess it as mere tinkering. But apart from the fact that tinkering is a grossly inadequate response to India's crying need for urgent reform, there is a direct impact from some of the arguably anti-market measures put forth by the finance minister. These include a nearly 20% increase in 'planning' expenditure. Apart from the bureaucratic manna flowing from this increase, it represents an unfortunately undying belief in the benefits of a planned economy. Coarser elements include a near obscene amount in the form of an 'economic package' devoted to the black hole that otherwise passes for a government in the state of Bihar.

The Budget has garnered occasional praise for addressing the agrarian deficit that unexpectedly ejected the previous coalition. But the slew of measures which include seemingly anodyne terms as 'generating gainful employment in agriculture' and specifics as an approximately $600 million irrigation program will more likely result in government waste rather than lift the agrarian economy rapidly into modernity. Instead, they could do worse than imitate the example of largely agricultural Yugoslavia where, in a space of little over a decade, there is a flourishing private mechanism in virtually aspect of the agriculture sector including in the two areas India falls woefully short, pricing and distribution.

An Indian Budget without a bureaucratic commission is a non-starter and this one duly recognises that in appointing one for investment. It matters little that the Indian or international consumer is eminently capable of deciding where to put his or her money without the government's canalizing efforts that result in inefficiencies at best or, at worst, high-minded theft. Equally integral to the budgetary process is the presence of a raft of subsidies ranging from free food for the poor (targeted at 20 million families) to food stamps and food for work programmes.

While food doles meet an immediate need to avert starvation, the government's Budget offers little if anything to ensure a prevention of dependency -- a natural corollary of welfare entitlements. That no nation, including the US in the Depression era, has bootstrapped itself out of poverty via food subsidies seems a heartless truism. But the negatives of subsidies including its propensity to propagate itself cannot be repeated often enough.

The opportunity cost arising from time lost due to the Budget's shortcomings is particularly unconscionable. While in reality some of the measures in this Budget are a low blow to India's fiscal as well as social health, its failure to think out of the box, notwithstanding the government's limited electoral mandate, is a signal disappointment and a considerable loss to all.  

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